The earnings outlook for Japanese firms. While the U.S. corporate sector has experienced little or even negative earnings growth in recent fiscal years, Japanese firms have posted solid earnings growth and it’s worth noting that Japanese accounting standards are more conservative than elsewhere. Looking forward, I believe there is room for upward revision to currently low Japanese earnings estimates, given that current (and as always, conservative) projections were created at the start of the calendar year. Back then, the global growth outlook was less certain, and corporate guidance was more timid than usual due to now-resolved uncertainty over spring wage negotiations and a consumption tax hike. These upward revisions could provide a boost to Japanese stocks in coming months, especially if a corporate tax cut is passed over the summer.
A weaker yen. The continued U.S. recovery and the divergent U.S. and Japanese monetary policies imply a weaker yen (vs. the dollar) in the medium term. This, in turn, should help support Japanese corporate earnings.
Market Realist – A weaker currency helps boost a country’s exports by making them cheaper than other products from other markets. In Japan’s case, other countries such as Korea, Thailand, and Singapore are key competitors in the international export markets. Increased exports improve the country’s trade balance and bolster the economy through increased corporate revenues and profits.
To be sure, the Japanese stock market is not without its risks. In the near term, many investors are expecting the BOJ to come to the rescue with additional monetary easing this summer given that inflation remains well below the central bank’s target. So, there’s the risk that the BOJ will maintain its current policy for longer than the market expects.
Even more importantly, over the longer term, the case for Japanese equities rests on structural reforms and improving corporate governance, changes that will take time. Still, given the many factors supporting Japanese equities, and especially a hedged position in the market, in 2014, I think Japan is an attractive bargain worth considering. In fact, other investors appear to be realizing this too. While Japanese stocks are certainly still down year-to-date, they are currently roughly 9% up from their April lows.
Sources: BlackRock, Bloomberg
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist.
International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets or in concentrations of single countries
Market Realist – To learn how Japan’s monetary policy affected the yen’s value, see Does “Abenomics” mean a new era of yen depreciation?